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Big Fraud in a Small Town


​​I was recently interviewed by a small town newspaper regarding a significant fraud that had happened in the community. In a town with a population of approximately 2,500 people, a local company was defrauded of over $700,000. Although I was not involved in the investigation of this fraud, I was interviewed for my advice on how business owners can protect themselves from employee theft / fraud.

Be aware of red flags, no matter how small
  • Fraud is usually detected by accident, and it is usually one suspicious transaction that triggers a closer look. It might be a $300 accounting discrepancy or a missing cheque, but that is usually just the tip of the iceberg. The total fraud can be up to 10 times that initial discovery.
  • An employee who commits fraud will usually start small, just to test if the owner will detect it. If it goes undetected, the employee will try something bigger.
  • Employee theft or fraud is ongoing - the theft or fraud is committed to satisfy a hidden need, such as a gambling problem, a drug addiction, or debt problems, and those needs are usually ongoing.

As an owner, maintain control of your business
  • Never give too much control to an employee. Yes, it’s a small town and your bookkeeper is a family friend or a trusted member of the community – but that doesn’t mean that they won’t steal from you.
  • Don’t be afraid to monitor and review the activities of your business. Most human beings shy away from confrontation. If you ask your accountant to review the books and s/he gets defensive, do not apologize for offending them or “not trusting” them. You are the owner. You have the right to look at your books.
  • Never pre-sign cheques when you are going away on vacation – in today’s day and age, most vendors can wait to receive payment or payment can be made on credit while you are away. If you must pre-sign cheques before you leave for an extended period of time, keep track of the cheque numbers that you have pre-signed and review every one and its supporting documentation when you return.
  • Do random spot checks of various accounting functions. Perform the bank deposit yourself once in awhile. Review the accounts receivable when you have a spare moment. When employees know that you are randomly monitoring, it decreases the opportunity for fraud.

Keep certain documents “for your eyes only”
  • Have your company bank statements sent directly to your residence. Read through the bank statements and scan through the copies of the cleared cheques. Do the expenses make sense? Does that look like your signature on the cheques? The bank statements do not need to be mailed to the company address – this increases the risk that you may not ever see it, or that certain pages (i.e. the scanned cheques) are hidden from you.
  • If your employees are given company credit cards, have the credit card statements sent directly to your residence. Review every transaction to ensure that the expenses make sense and are business related.

Be aware of:
  • Employees with company credit cards. We see a lot of fraud related to the personal use of company credit cards. Using a company credit card for personal use satisfies an immediate need for the fraudster, and they know that the statement won’t be reviewed for another month, if at all. That gives them a month to try to conceal the fraud.
  • Employees who come in early, leave late, and never take vacation. Is their workload too much? Or are they trying to conceal something?

If you suspect an employee of committing fraud:
  • Do NOT fire them immediately. There is a chance that your suspicions may be wrong, and you can find yourself facing a wrongful dismissal lawsuit.
  • Suspend the employee while you conduct a further investigation. If an employee is suspended, they are still considered an employee and are required under labour legislation to assist with an employer investigation.

Buy employee fidelity insurance
  • You insure your company against fires and floods, but is it insured against the employee who walked out of your company with $700,000 in their pocket? Ask your insurance company about employee fidelity insurance. There are insurance policies out there that will cover you against employee fraud / theft, as well as the professional fees (legal fees, forensic accounting fees) associated with the investigation.

Click here to read the original article in The World-Spectator